How Rail is Reshaping America’s Energy System

(Open Markets – May 21, 2013) How Rail is Reshaping America’s Energy System (by Debbie Carlson)

Railroads, that 19th-century technology, are having a 21st-century impact on the U.S. crude oil industry.

The swift growth in U.S. petroleum production left the energy industry with a lot of crude oil and nowhere to send it. With pipelines full, energy companies began to look at shipping crude oil via rail, the way it was transported when the U.S. energy industry was in its infancy over 100 years ago.

What was first seen as a stop-gap measure to deal with extra output is now being considered a viable complement to pipelines and a permanent part of the energy infrastructure in the U.S. Since the U.S. Energy Department forecast U.S. crude production to grow to 8.15 million barrels a day by December 2014, from the 6.89 million produced in November 2012, the U.S. will rely on even more on rail.

“Pipelines will fail to keep pace with North American crude production,” say analysts at Morgan Stanley. “Rails are needed to move trapped inland crude from Williston and Alberta basin and Eagle Ford shale.”

In 2012, the Association of American Railroads said it moved a record amount of crude oil: 233,811 Class 1 carloads, up 256 percent from the 65,671 carloads moved in 2011. That’s equivalent to about 350,000 barrels a day, says Rusty Braziel, president, RBN Energy, who has extensively analyzed the growing use of rail in the energy industry.

By 2014, Morgan Stanley estimated these carloads can grow to about 450,000 annually.

That’s still a fraction of the oil sent by pipeline, but the 2012 data shows how quickly the energy industry embraced rail to ship crude oil. “Railroads have made a significant impact,” Braziel says.

The tremendous growth in oil production in North Dakota’s Bakken region spurred rail use, Braziel said, as there weren’t enough pipelines to accommodate output. There are three reasons why the energy industry remains interested in this transport method: unit rail car trains, the opportunity for producers to sell to a variety of destinations, and the shorter-dated contract times railroads offer versus pipelines.